Launch of the Euro - unc.edu

Launch of the Euro Launch of the Euro

Corsetti & Pesenti Dec. 31, 1998, based on ECU and bilateral
parities as announced May 1998
Launch of the Euro TARGET payments system for large
The Strategy of Monetary Policy transfers (Trans-Europe Real-time Gross
Implementation of the Strategy Settlement Express Transfer)
Instruments of Monetary Policy ECB, established June 1998, coordinated
Liquidity Management monetary policy in advance of euro
Bond Market, Public Debt, & Equities Continuity with Bundesbank policy strategy
Banks, Mergers & Acquisitions
Exchange Rate of the Euro
Asymmetries in the Eurozone
The Stability & Growth Pact

The Strategy of Monetary Policy Implementation of the Strategy

HICP price increase of < 2% over medium term Focus on Price Stability at expense of output?
Two “pillars” for monitoring inflation:
– 4.5% “reference” growth rate of M3 – April 1999 interest rate cut as evidence against
– Economic factors influencing price inflation – Lack of concern over external value of euro
– Dual targeting of money and inflation raises questions
Reports and analysis to Press and EP monthly Bias in favor of weaker countries?
– No forecast of inflation
– No minutes of meetings – In response to fiscal constraints from SGP
– National Central Bank representatives on Monetary

Policy Committee

Role of monetary aggregates in “Two Pillar”
Strategy

– Depends on stability of euro money demand
– Continuity with Bundesbank policy rules

Accountability vs. Secrecy in voting and minutes

Instruments of Monetary Policy Euro Interest Rates

Open Market Operations

– NCB repo purchases/sales via auction at fixed (refi)
rate, switched to variable rate in mid-2000

– Volume averaging € 3 trillion per year
– Problems in forecasting impact of national Treasury

operations on bank liquidity

Deposit and Lending Facilities
Excess Reserves remunerated at refi rate

Liquidity Management Target System Volume

TARGET (Trans-Europe Real Gross Source: ECB Monthly Report, October 1999
Settlement Express Transfer) System

– for large inter-country payments
– Competes with private systems in France,

Germany, etc.
– Domestic volume exceeds cross-border volume

Interbank market for overnight reserves

Bond Market, Public Debt, & Equities Debt Securities Market

Rapid growth of corporate bond market, especially Source: BIS Annual Report 2001
on issuing side
Shift from bank financing via bonds to direct
corporate borrowing
Government bonds reflect credit quality of
different governments, relative to SGP goals
European equity markets boomed in 2000,
slumped in 2001-2002

– Need for Euro company law, common prospectus
– Lamfalussy Committee Report

Euro- bonds Banks, Mergers & Acquisitions

Bank-dominated vs. market-oriented finance
(German vs. Anglo-Saxon model)
Within country consolidation – “national
champions”

– Reduced competition in segmented national markets
– National supervision of banks may lack rigor

Future development of Eurozone-wide banks
Mergers up from 300/yr in 1980s to 400-800/yr
86-92.

German vs. Anglo-Saxon Financial Markets Exchange Rate of the Euro

Bank credit and stock market in Euro weakness since 1999 introduction a
OECD countries (% of GDP) surprise
Business cycle differences the main reason
Stock Market 2 US Lux Swz Increased supply of euro assets > increased
1.8 demand, especially given strong US stock
1.6 AuCsan UK Nld Jap 1.5 market
1.4 Discussion of “target zone” for $/€ rejected
1.2 NZl Ire Nor Swe Spa Ger 1 F in in 1999
Tur Ita FiDn en FProar Lux
1 Swe
0.8 0.5
0.6
0.4
0.2

0

0

Bank Credit

Aus As t Bel Can Den

Fra Ger Ire Ita J ap

Nld NZl No r Po r Sp a

Swz Tur UK US

Impact of Business Cycle on Euro PACIFIC Exchange Rate Service

Euro Exchange Rate

© 2002 by Prof. Werner Antweiler, University of British Columbia, Vancouver BC, Canada.
Permission is granted to reproduce the above image provided that the source and copyright are acknowledged.

Time period shown in diagram: 1/Jan/1999 - 8/Nov/2002

Asymmetries in the Eurozone EU Growth & Cycles

Disparities in Growth Trends – Periphery vs. Core
Synchronization of cycles
Endogenous currency union optimality
Asymmetries in transmission of monetary policy

– Reliance on consumer credit
– Importance of variable rate mortgages
– Role of bank credit vs. credit market

Inflation disparities due to catch-up of faster-
growing laggards
Price level disparities due to market segmentation

Correlation of Shocks vs. Trade Shares The Stability & Growth Pact

Correlation Optimal Currency Area US States To enforce Maastrict Criteria on members:
of income
shocks Monetary Belgium, – Target Budget Balance, to allow deficits in recessions
independence Netherlands – Convergence Programs required, with monitoring
– Excess Deficit > 3% of GDP only if “unusual event” or
EU member
countries “serious downturn” (-2% of GDP or “further supporting
evidence”)
Japan OCA line – Action Plan to remove deficit required
US, EU – Sanctions after 10 months of non-compliance, sooner if
deliberate
Extent of trade among members – Non-interest-bearing deposit [0.2% of GDP + 10% of
excess deficit, up to 0.5% of GDP], converts to fine
after 2 years of non-compliance

Euro Zone Fiscal Deficits

Percent of GDP Euro Area Countries 2000
2001
8 2002
2003
6

4

2

0
BE DE GR ES FR IE IT LU NL AT PT FL

-2
3%

-4

-6
Deficit or Surplus

Source:European Commission Forecasts, Autumn 2002